Those fickle consumers! After being presented with a whopping monthly price increase of 60%, 800,000 U.S. subscribers bailed on Netflix in the third quarter of this year. And the company’s stock tanked as a result. At the close of business Monday October 24th the Company’s stock was at 119. By Tuesday morning it was at 75 and currently hovers at 80. In July it was $300. This, while the company has negotiated a potentially great deal with Dreamworks Animation and posted third quarter earnings that rose an impressive 65% from $38 million to $62.5 million. What does this say about investor confidence?

True, the Company has admitted candidly to shareholders that it moved too quickly and dramatically to raise prices although it has emphasized that the new prices are where they have to be in the longer term. But, there is a bit of defiance in between the lines. Interviewed by The New York Times for its October 23rd Magazine Section, Reed Hastings, CEO of Netflix observes that when Netflix started its stock price was $7.50 and it had a million subscribers and it is a mistake to measure everything by what happened recently. Fair enough.

But there seems to be a failure to recognize the obvious. Competition not only looms in the wings. It’s right in Netflix’s face. Confidence is good. Over-confidence can be dangerous. Hastings fails to recognize that Netflix does not have any special competitive advantage in its industry. Yes, it clobbered Blockbuster and yes it got a good jump on internet streaming. However, here’s what is competing with Netflix, now and in the future: cable networks, Direct TV, Dish, Hulu (currently being courted by Google and Amazon), Redbox, and that old stand-by Blockbuster which certainly sees an opportunity to jump back into the game big-time.

Netflix no longer has a monopoly on a product or an idea. Thus it must now compete on service and price. Unless it discovers a new method of delivery or obtains a lock on new products, it will have to provide a superior product at a fair price if it wishes to continue to distinguish itself from its competitors. Which may mean its heyday is over. And that’s the lesson all businesses can take away from the Netflix experience. Better to compete like you have competitors breathing down your neck rather than act like you are the kingpin to whom all customers shall pay homage.

You sit around the conference table and throw out ideas. You think outside the box. You think inside and around it. You crunch numbers. The numbers point in a logical direction. You come up with a winning profit strategy that makes sense. You implement the strategy and blow yourself out of the water. Hello Netflix, which recently announced a restructuring that would divide its business into two segments – providing entertainment by mail and by download – at a hefty increase in customer fees.

Business decisions aren’t made in an isolation booth. Stakeholders, stakeholders, stakeholders. Why do businesses always forget some of their stakeholders? The word has become trite; it’s been used so often. Nevertheless the concept just doesn’t seem to sink in for many business executives. Granted, you can’t please all stakeholders all of the time, and certain stakeholder interests may conflict with those of other groups – but the least you can do is be awake.

Stakeholders are any group or even individual(s) whose interests are important to your company and must be served. If a stakeholder interest is not served, it should at least not be harmed especially if harming the stakeholder will harm you. Here are the most common of them: shareholders and/or investors, customers, suppliers, governmental regulatory agencies, employees, the public at large for health and safety issues and finally, even the media. It’s quite a list and of course not everyone can be happy all of the time.

However, management must always try to forecast the effects of its decisions on its stakeholders. What may be an excellent decision on paper may have disastrous results. Enter Netflix. It is difficult to believe that executives of that company gave any heed to the reaction of its customers. And if they did, they wrongly concluded that there would be some grumbling but they could just hunker down and it would blow over.

Blow over? Netflix is facing an angry customer base. Will it face mass defections? Perhaps. Maybe Netflix concluded that it should take the backlash at all once. Perhaps it feels that its new higher prices and a smaller, better quality customer base better suits its model. The risk, however, is that its base will shrink too much and the company’s revenues will decrease dramatically.

What does a company do after it does its homework and knows that a good corporate decision will have adverse consequences for one or more stakeholder groups? It can be a difficult and agonizing decision. One course of dealing, and the one that makes the most sense when considering an elective course of action, is to implement changes in steps. MODERATION is the key. The first benefit is that you can get a handle on reaction. Similar to a test market, you can assess the effects of your action, make adjustments, refine, modify, go to plan B, etc. Secondly, by going slow, you don’t shock the stakeholders who are affected. It’s the difference between giving a stakeholder a rash versus a blow to the solar plexus.

Don’t make decisions with your head in the clouds. Know the effects of your decisions on others, anticipate what the reactions will be and the effects those reactions could have on your company.

About

Michael Nayor is founder and CEO of the Rhodell Group, LLC, a consulting firm that provides comprehensive crisis management services. He is a graduate of Cornell University (B.S., M.B.A.), New York University School of Law (J.D.) and the State Department’s Foreign Service Institute advanced program in economics.